---

The General Business Credit (GBC) is a valuable tool that can significantly reduce federal income tax obligations for qualifying small businesses. Unlike deductions, which merely reduce taxable income, tax credits like the GBC offer a dollar-for-dollar reduction in tax liability, making them substantially more beneficial. The GBC acts as an “umbrella” credit that includes a variety of individual business-related credits. Understanding the ins and outs of the GBC is critical for businesses looking to maximize their tax efficiency.

Which Businesses Are Eligible?

Eligibility for the GBC extends primarily to small businesses that are not publicly traded. This includes privately owned companies, partnerships, and sole proprietorships. To qualify, a business must have average annual gross receipts of no more than $50 million over the preceding three-year period. This gross receipts test is crucial because it determines whether a business can benefit from the GBC.

For businesses that have not existed for the entire three-year period, the average annual gross receipts must be calculated based on the period during which the business did exist. If the business had a short tax year (fewer than 12 months), the gross receipts for that period must be annualized. This is done by multiplying the gross receipts by 12 and then dividing the result by the number of months in the short period. This method ensures that businesses with shorter operational histories are still evaluated fairly under the gross receipts test.

It’s important to note that partners in partnerships or shareholders in S corporations typically cannot claim the GBC individually. However, there is an exception: if both the business and the individual partner or shareholder meet the gross receipts test, the credit can be treated as a current year credit.

What Does the Credit Include?

The GBC covers a wide range of individual credits, each of which can significantly contribute to reducing a business’s tax burden. Here are some of the key credits included under the GBC:

• Investment Credit: This includes credits for specific types of investments that help businesses grow and improve their operations.
• Work Opportunity Credit: Offered to employers who hire individuals from certain target groups with significant barriers to employment.
• Research Activities Credit: Available for businesses that increase their research and development efforts.
• Disabled Access Credit: Helps businesses accommodate disabled employees and customers.
• Alternative Motor Vehicle Credit: Promotes the use of environmentally friendly vehicles.

In addition to these, there are other credits related to renewable energy, housing, employer-provided childcare, and employee health insurance premiums. The diversity of these credits makes the GBC a powerful tool for businesses engaged in various sectors, from energy to employment and innovation.

It’s important to be aware that some of these credits have expiration dates or other specific conditions. Therefore, consulting with a tax advisor is essential to confirm that a particular credit is available for the year in which you plan to claim it.

How Much Is the Credit?

The amount of GBC a business can claim is determined on a “first-in, first-out” basis. This means that credits earned in previous years are used first, followed by the current year’s credits. The total credit for any given year is a combination of carryforward credits from prior years and the current year’s credits. If, for example, a business has unused credits from previous years, these can be applied to the current year’s tax liability.

One of the limitations of the GBC is that it is nonrefundable. This means that the credit can only reduce the tax liability to zero—it cannot generate a refund. However, unused credits can be carried back one year or carried forward for up to 20 years. If any credits remain unused after this carryforward period, they can be claimed as a tax deduction in the following tax year.

Certain credits within the GBC are subject to different carryback rules. For instance, energy-related tax credits eligible for elective payments or transfers under the Internal Revenue Code Section 6417 can be carried back three years and forward 20 years, starting with the 2023 tax year. Additionally, specific credits related to oil and gas production can be carried back five tax years.

The IRS imposes a cap on the amount of GBC that can be claimed in a single year. The credit is limited to 25% of the excess of net income tax over $25,000. Net income tax is calculated as the sum of regular tax liability and the alternative minimum tax (C corporations are no longer subject to the alternative minimum tax), reduced by certain other credits.

How to Claim the Credit

Claiming the GBC is a detailed and often complex process that requires careful calculation of each individual credit included in the GBC. These credits must be calculated separately on their respective IRS forms before being consolidated onto IRS Form 3800, which is the General Business Credit form.

Form 3800 itself is subject to change, particularly in light of recent legislative developments such as the Inflation Reduction Act and the CHIPS Act (Creating Helpful Incentives to Produce Semiconductors). These changes can make the form more complicated, but they also may offer additional opportunities for businesses to maximize their credits. It’s advisable to stay updated on these changes and consult with a tax professional to ensure that the credits are correctly calculated and claimed.

Why the General Business Credit Is Worth the Effort

While navigating the intricacies of the GBC can be daunting, the potential tax savings make it well worth the effort. Small businesses, in particular, can benefit significantly from the various credits included under the GBC, which are designed to support business growth, innovation, and sustainability.

Whether it’s offsetting the cost of hiring new employees, investing in research and development, or adopting environmentally friendly practices, the GBC provides a valuable incentive for businesses to engage in activities that can drive both their success and broader economic growth.

Given the complexity of calculating and claiming the GBC, it’s crucial to work with a knowledgeable tax advisor. Doing so can help ensure that your business maximizes its eligibility for the credit and that all necessary forms are accurately completed.

Contact Burton McCumber & Longoria today to discuss how your business can benefit from the General Business Credit. Our team of experienced professionals is here to guide you through the process and help you optimize your tax strategy. With our support, you can confidently navigate the complexities of tax credits and focus on what you do best—growing your business.